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May 30, 2012 -- A growing number of private equity firms are investing in dental management companies, which they see as one of the few growth areas in the current economic recession.

Small Smiles is one of at least 25 dental management companies that have been bought or backed by private equity firms in the last decade, according to Thomas Climo, a Las Vegas dental consultant. These companies account for about 8% (12,000) of the dentists licensed in the U.S., he said.

Topspin and AUA Private Equity Partners, both New York-based equity funds, announced earlier this month that they had invested an undisclosed amount in Brighter Dental Care, a regional dental practice management company that operates and manages seven affiliated dental practices in New Jersey.

Last November, private equity investment firm JLL Partners paid $398 million to buy American Dental Partners (ADP). ADP is affiliated with 27 dental group practices, which have 282 dental facilities and about 2,400 operatories in 21 states.

And in 2008, the Audax Group bought a majority stake in Great Expressions Dental Centers, expanding the platform from about 100 practices to 152 locations.

Currently, there are 24 large dental practice management companies in the U.S., with annual revenues of more than $100 million, Climo said.

Private equity buyout firms have been attracted to dental practices because they are less regulated than physician groups, and patients often go to their dentists more regularly than to their doctor, according to Sandy Steever, an editor with Irving Levin Associates, a Norwalk, CT, publisher which tracks mergers and acquisitions in healthcare.

"They attract less scrutiny because dental services are seen as more peripheral than physicians' services," he told DrBicuspid.com. "In one sense, I think healthcare is noncyclical because it's a regular need. I have seen a lot of private equity getting into dental servicing companies."

But not everyone is a fan. Consumer and practitioner complaints abound: Crowns placed on baby teeth that are about to fall out. Children strapped to papoose boards systematically without their mothers or others to reassure them. Being told to wipe down instruments rather than sterilize them. Production quotas for dentists. Time limits for hygienists.

"The hideously abusive practices are what happen when a dental clinic is run by a private equity firm, purely for profit," according to testimony by attorney James Moriarty to Texas legislators during last summer's investigations of dental management companies. He has filed a class-action lawsuit against dental chain Small Smiles over unnecessary Medicaid billing.

“Individual dentists are only responsible to themselves, not a board that's looking for return on investment.”
— Frank Catalanotto, DMD, University
of Florida College of Dentistry

"The results are twofold: harm to children and extraordinary cost to taxpayers," Moriarty told lawmakers.

Frank Catalanotto, DMD, a professor and chair of the department of community dentistry and behavioral sciences at the University of Florida College of Dentistry, said the problem results from treating dental care like a commodity instead of a health need.

"When you're really driving to increase profits because you have to return equity to shareholders, you have greater difficulty," Dr. Catalanotto told DrBicuspid.com. "At least individual dentists are only responsible to themselves, not a board that's looking for return on investment."

Several of these chains are being investigated for Medicaid fraud and overbilling, or have gone bankrupt amid government investigations.

Allcare Dental abruptly closed its dental offices in 13 states in January 2011, leaving thousands of patients with unfinished care and prompting attorneys general in at least two states to sue the corporation for violating consumer protection and credit laws. Allcare filed for bankruptcy in November 2011.

In 2006 Small Smiles, which had clinics in 22 states and Washington, DC, was purchased by a consortium of investment firms, including the Carlyle Group, Arcapita Corporate Investments, and American Capital for $470 million. Four years later, the dental chain settled a U.S. government lawsuit for $24 million and still faces lawsuits over alleged mistreatment of young patients. Church Street Health Management, the company that operates Small Smiles, filed for Chapter 11 bankruptcy in February of this year.

All Smiles Dental Center, a chain of 51 dental clinics in Texas that has been the target of investigations into its Medicaid billing practices, filed for bankruptcy this month. Founder Richard Malouf, DDS, and the dental chain agreed in March to pay $1.2 million as part of a settlement agreement related to charges of Medicaid fraud.

All Smiles, which was acquired by private equity firm Valor Equity Partners in 2009, received more than $10 million for Medicaid orthodontic services in 2010, according to Christine Ellis, DDS, MSD, a Dallas orthodontist and clinical professor in oral surgery at the University of Texas Southwestern Medical Center in Dallas, one of the auditors for Texas' Office of Inspector General (OIG).

Dr. Ellis testified before Texas lawmakers last year and to a U.S. House of Representatives committee on government oversight in Washington, DC, last month regarding Medicaid fraud.

"The flagrancy of the fraud that I have found in the course of auditing for OIG is truly unbelievable," she told the House panel.

In September, Dr. Ellis filed a complaint with the Texas State Board of Dental Examiners (TSBDE) against Dr. Malouf for facilitating the illegal practice of dentistry by a corporation. Most states have laws requiring that only licensed dentists or firms they own can practice dentistry.

But the dental board dismissed the complaint, claiming it only had jurisdiction over licensed dentists, not corporations operating management companies, according to Dr. Ellis.

"It begs the question that if the TSBDE will not defend the Texas Dental Practice Act, who will?" she asked.

More regulation needed

Critics are calling for more regulation of these businesses, citing unnecessary procedures and quotas for dentists. In North Carolina, for example, lawmakers are considering tougher rules that would give the dental board more tools to investigate and enforce regulations regarding dental chains.

"Corporations or private equity firms are totally focused on one thing: profit," M. Alec Parker, DMD, executive director of the North Carolina Dental Society, told DrBicuspid.com. "I think these service organizations will have a place as long as there are some clear lines of delineation of what they can and can't do."

He has heard "horror stories" from dentists, dental hygienists, and dental assistants who worked for dental management companies.

"One dental assistant was appalled when she was told that orthodontic instruments are very expensive, and if they go through the sterilizer several times they become dull so she was told to wipe them down," Dr. Parker told DrBicuspid.com. "Hygienists were given 30 minutes for each patient, no matter if the patient hasn't been to a dentist in a very long time or were there three months ago. Dentists talked about production quotas and were given time limitations."

Dr. Parker concurred with Dr. Ellis's complaint about dental boards not having the legal authority over management companies and stressed the need for more regulatory oversight.

"What galls me is at least if a dentist does something wrong there's a regulatory body that has direct oversight and their license is at stake," he pointed out. "But dental management companies don't have to answer to the dental board because they have no purview, because they don't have a dental license."

More stringent rules would not only help guard against fraud but would also save taxpayers' money, Dr. Parker noted. "Texas is a great example where they sucked all this money out of the Medicaid program, and now they don't have as much money to treat the people who really need care," he said.

New dental graduates saddled with hundreds of thousands of dollars in loans may be tempted by six-figure salaries promised by many dental management companies, he added.

"They're really at the mercy of having to find some way to pay student loans while not being in a situation where they feel like they're prostituting themselves," Dr. Parker said. "We've got case after case where people were pressured to cut corners; they felt taken advantage of and were made to do things against their ethical judgment. In reality, it was survival."

Not all bad apples

But Dr. Parker acknowledged that some management companies provide valuable administrative services for dentists and cautioned against tarring all such companies because of the unethical actions of a few "bad actors."

Ronald H. Hsu, DDS

Ronald H. Hsu, DDS, is a pediatric dentist with Gentle Dental, part of the Interdent group, a practice management company that owns and operates seven brands with 120 offices and more than 450 dentists in eight Western states.

While Dr. Hsu also denounced unethical practices by management companies, he pointed out that dentists bear some responsibility for questionable treatment practices.

"It's abusive to patients, it's fraudulent to taxpayers, and it definitely does not conform to the ethics of healthcare professionals," he told DrBicuspid.com. "At same time, I feel that dentists are responsible for upholding their own standards. If you're in a situation where you know you're not doing the right thing, you should pipe up and leave or do both."

When he began working at Gentle Dental, managers were concerned about the number of patients he was seeing.

"When I first started, my production numbers weren't pretty, so I had a discussion with management," Dr. Hsu explained. "I understand they have expectations, but they also understand my practice philosophy, and in the end we both decided to just be patient."

Within 18 months the problem was resolved, he added. "I'm seeing a whole lot more patients and giving them a good experience, and they became my advocates in community," he said.